12 February 2012

The food industry is characterised by market failures that pass external costs on to consumers and to society

More than one in six US children and adolescents are reportedly obese, triple the 1980 rate [GALLO/GETTY]

A systematic and broad failure of regulation is the elephant in the room when it comes to reforming today's Western capitalism. Yes, much has been said about the unhealthy political-regulatory-financial dynamic that led to the global economy's heart attack in 2008 (initiating what Carmen Reinhart and I call "The Second Great Contraction"). But is the problem unique to the financial industry, or does it exemplify a deeper flaw in Western capitalism?

Consider the food industry, particularly its sometimes malign influence on nutrition and health. Obesity rates are soaring around the entire world, though, among large countries, the problem is perhaps most severe in the United States. According to the US Centres for Disease Control and Prevention, roughly one-third of US adults are obese (indicated by a body mass index above 30). Even more shockingly, more than one in six children and adolescents are obese, a rate that has tripled since 1980. (Full disclosure: my spouse produces a television and web show, calledkickinkitchen.tv, aimed at combating childhood obesity.)

Of course, the problems of the food industry have been vigorously highlighted by experts on nutrition and health, including Michael Pollan and David Katz, and certainly by many economists as well. And there are numerous other examples, across a wide variety of goods and services, where one could find similar issues. Here, though, I want to focus on the food industry's link to broader problems with contemporary capitalism (which has certainly facilitated the worldwide obesity explosion), and on why the US political system has devoted remarkably little attention to the issue (though First Lady Michelle Obama has made important efforts to raise awareness).

Obesity affects life expectancy in numerous ways, ranging from cardiovascular disease to some types of cancer. Moreover, obesity - certainly in its morbid manifestations - can affect quality of life. The costs are borne not only by the individual, but also by society - directly, through the healthcare system, and indirectly, through lost productivity, for example, and higher transport costs (more jet fuel, larger seats, etc).

Michelle Obama has made efforts to raise awareness of combatting obesity [GALLO/GETTY]

But the obesity epidemic hardly looks like a growth killer. Highly processed corn-based food products, with lots of chemical additives, are well known to be a major driver of weight gain, but, from a conventional growth-accounting perspective, they are great stuff. Big agriculture gets paid for growing the corn (often subsidised by the government), and the food processors get paid for adding tonnes of chemicals to create a habit-forming - and thus irresistible - product. Along the way, scientists get paid for finding just the right mix of salt, sugar and chemicals to make the latest instant food maximally addictive; advertisers get paid for peddling it; and, in the end, the healthcare industry makes a fortune treating the disease that inevitably results.

Coronary capitalism is fantastic for the stock market, which includes companies in all of these industries. Highly processed food is also good for jobs, including high-end employment in research, advertising and healthcare.

So, who could complain? Certainly not politicians, who get re-elected when jobs are plentiful and stock prices are up - and get donations from all of the industries that participate in the production of processed food. Indeed, in the US, politicians who dared to talk about the health, environmental, or sustainability implications of processed food would in many cases find themselves starved of campaign funds.

True, market forces have spurred innovation, which has continually driven down the price of processed food, even as the price of plain old fruits and vegetables has gone up. That is a fair point, but it overlooks the huge market failure here.

Consumers are provided with precious little information through schools, libraries or health campaigns; instead, they are swamped with disinformation through advertising. Conditions for children are particularly alarming. With few resources for high-quality public television in most countries, children are co-opted by channels paid for by advertisements, including by the food industry.

Beyond disinformation, producers have few incentives to internalise the costs of the environmental damage that they cause. Likewise, consumers have little incentive to internalise the health-care costs of their food choices.

If our only problems were the food industry, causing physical heart attacks and the financial industry facilitating their economic equivalent, that would be bad enough. But the pathological regulatory-political-economic dynamic that characterises these industries is far broader. We need to develop new and much better institutions to protect society's long-run interests.

Of course, the balance between consumer sovereignty and paternalism is always delicate. But we could certainly begin to strike a healthier balance than the one we have by giving the public far better information across a range of platforms, so that people could begin to make more informed consumption choices and political decisions.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.